There are two schools of thought with respect to the future evolution of guanxi in China’s fast-paced business environment. Some feel that the role of guanxi is declining in the face of market forces and expect that both within China and abroad, businesses will compete on a level playing field based on arm’s-length transactions. The recent case of Citic Pacific and its head, Larry Yung, is cited as an example (box CS.7).
The second school of thought, which is more generally accepted, main- tains that despite economic advances, guanxi is more entrenched than ever. Although there have been periodic efforts by the Chinese govern- ment to communicate the demise of guanxi in business, it remains a deeply embedded part of Chinese culture and will, in all likelihood, con- tinue to heavily influence business conduct in the future.
Even so, the practice of guanxi has been evolving. Whereas in the past guanxi was essential at every point in a transaction, this is no longer the case in China today. “It’s absolutely necessary to open doors in the
Box CS.7. Is Guanxi Declining in China? Hints from a Recent Case Larry Yung, the son of China’s former vice president Rong Yiren, was widely known for his formidable guanxi ties in China. His personal reputation as someone who could get things done helped send Citic Pacific’s stock surging in the 1990s.
In a sign that even Yung’s guanxi has limitations, in January 2002 Citic Pacific announced that it was selling a fiber-optic network that it had acquired in 2000. The company failed to circumnavigate China’s law barring foreign companies from getting licenses to operate in China. This was interpreted by some to mean that “Beijing may be telegraphing a message that guanxi capitalism is dead” (Balfour and Einhorn 2002).
beginning. But once the initial foundation is established, guanxi is less important than it used to be,” according to Mitchell Presnick, managing director of Edelman Public Relations in China.
Furthermore, the rule of law is growing in China. “The role of guanxi is still there for Chinese and foreign companies, but the role of contracts has also expanded. There is more reliance on contract specifications and stipulations,” says Yadong Luo of the University of Miami School of Business. In recent years procedures, laws, and regulations have become more standardized and now conform more closely to international norms.
Most important, there has been a distinct evolution away from the “gen- tleman’s handshake” and toward contracts as an accepted means of mak- ing business commitments.
There have also been structural changes in how guanxi is used today.
Whereas in the past guanxi with government officials in China was con- sidered of primary importance, businesspeople are increasingly recogniz- ing the value of guanxi with other firms and stakeholder groups. Firms are viewing guanxi more strategically and flexibly than formerly. Thus, efforts are being made to transfer the personal guanxi of employees to the firm level. This new strategic approach to guanxi is being pursued in Chinese and Western firms alike.
In China today, Chinese and successful foreign firms share similar atti- tudes toward guanxi. For example, neither would shy away from hiring an individual solely on the basis of the value of the guanxi that person brings to the firm. For both, guanxi is first and foremost seen as a com- petitive advantage.
As China strives to comply with international business norms and compete globally, there are fewer areas that distinguish the guanxi prac- tices of Chinese firms from those of their foreign counterparts. Both some- times grapple with the business conduct issues that result from improper use of guanxi, just as they also actively seek to capitalize on the benefits and efficiencies to be derived from it. It seems certain that Chinese guanxi will continue to evolve to suit new environmental realities and will remain a defining characteristic of Chinese business conduct well into the future.
Notes
This section was prepared by Ms. Kris Day, Calico Consultants.
1. Several studies link guanxi with improved business performance and competitive advantage. See, for example, Fan and Ambler (1998); Leung, Wong, and Wong (1996); Yeung and Tung (1996); Abramson and Ai (1997);
and Luo (1997).
2. For example, many regulations that are inconsistent with WTO rules have been abrogated.
3. Zhongzhi Gao, a Chinese attorney and legal consultant to the World Bank, personal communication, 2001.
4. In the Transparency International’s Bribe Payers Index released in May 2002, Chinese companies were considered highly likely to pay bribes. Of 21 countries evaluated, China ranked second to last. (See <www.trans- parency.org> for details on the Bribe Payers Index.)
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Jardine Matheson, which was founded in the 19th century in Hong Kong (China), is a multinational enterprise with a portfolio of seven core busi- nesses concentrated mainly in the Asia and Pacific region. Although Jar- dine Matheson is active in 30 countries, 77 percent of its profit comes from Asia. Within Asia, 75 percent of this total is in Hong Kong and 5 percent in mainland China. The company’s activities include supermarkets, con- sumer marketing, engineering and construction, insurance brokering, automotive sales, property, and hotels. Companies in which Jardine Matheson has a substantial or controlling interest employ about 150,000 people.
Origins of the Ethics Program
Jardine Matheson’s current ethics program began in 1997 with a charge to James Watkins, the new director and general counsel of the group, to review and update a code that the company had issued in 1993–94. His approach was “to look at other company codes” and to develop business conduct guidelines relevant for “particular businesses and geographic areas” (personal communication, 2001).
A draft statement was submitted to and approved with minor changes by the Jardine Matheson board and the CEOs and chief financial officers (CFOs) of all the company’s major trading businesses. The code is the same for all businesses and countries.
The code was reissued in February 2001 with a cover note from the new managing director. At this point, major changes are not likely to be made.
As Watkins recalls, “The former CEO wanted it to be like the Ten Commandments. He would not be happy if it were subject to repeated amendments or changes.”
The code addresses antibribery policies, and the group policy manual that was designed for management use provides a more detailed discus- sion. Giving or receiving “illicit payments,” defined as “a secret payment to any person,” is banned. Employees must report to any senior staff
member any proposal or suggestion to make or receive such a payment.
Failure to comply with this condition is grounds for dismissal.
Senior staff approval is the key to determining what payments are acceptable. The policy permits “small facilitative payments in exchange for routine administrative tasks as long as such payments are not made to obtain preferential treatment.”
Implementation System
Code distribution proceeds on two tracks. Managers receive the “long- form” Group Policy Manual, and all staff at the clerical level and above receive copies of the Code of Conduct. In addition to English, the code has been translated into Chinese, simplified Chinese, Thai, Malay, and Indonesian.
Training is not formal or structured, and it is limited to a 30-minute pre- sentation by the group general counsel in the induction program for execu- tive staff. Case studies are not discussed, but the general counsel does give examples of the kinds of situation that senior managers might confront.
Reporting and Warning Procedures
The company has no whistle-blowing or hotline system. Persons who become aware of improprieties are encouraged to report such incidents to senior staff managers and, if need be, to bypass the person to whom they report.
Instead of a hotline, Jardine Matheson depends on quality manage- ment and self-discipline. Having introduced a code, it relies less on pub- lic or third-party exposure. Commenting on changes since promulgation of the code, Watkins says, “We get more enquiries asking whether activi- ties are permissible because there is now greater need for compliance and more attention to whether particular acts are allowed under the code.”
Fear of detection and exposure is not the only reason for seeking advice when confronted with questionable requests. The group audit requirement that senior managers submit a compliance letter with regard to activities under their direction and control is another important incentive for seeking clarification before making a decision that might contravene the code.
Watkins says that among managers there are differences in the degree of compliance, commitment, and diligence but that these are not rooted in cultural resistance. For example, with regard to the management team, he says,
They are there as a resource. We rely on them to help us get new business and for management control. We want them to encourage compliance. Some
do, others take it less seriously. Whatever the situation may be, the reasons are due to personal rather than cultural distinctions.
It is also harder to judge program effectiveness in remote locations than it is in Hong Kong, where corporate staff have regular contact with local managers. Nonetheless, Watson says, there is “no reason to believe that there are serious disparities.”